Foreign Owned US Operations Guide - Andersen Tax

1 Coming to America Tax Planning for Foreign - Owned Operations By Len Schneidman Andersen Tax LLC, June 2017 Andersen Tax LLC, | Tax Planning for Foreign - Owned Operations 1 Table of Contents Introduction .. 2 Tax Checklist for Foreign - Owned Operations .. 2 Typical Life Cycle of Foreign - Owned Operations .. 3 Form of Organization .. 3 Subsidiary .. 4 Branch .. 4 Partnership or LLC .. 4 Capitalization .. 5 Case Study Manufacturing in .. 6 Personnel .. 6 Repatriation of Profits (Including Royalties and Inbound Sales).

2 7 Case Study Sale and Distribution in 8 Exit Strategies .. 8 Andersen Tax LLC, | Tax Planning for Foreign - Owned Operations 2 Tax Planning for Foreign - Owned Operations Introduction This Guide is intended to outline some of the key tax issues that should be considered in establishing a Foreign - Owned business enterprise in the United States. Of course, Foreign is a relative notion. Used herein, it means a business entity (assumedly a corporation) Owned by shareholders. As can be seen from the Tax Checklist for Foreign - Owned Operations , the issues range from organizational and operational to repatriation of earnings and exit strategies.

3 There are, of course, a number of home country legal and tax issues that must also be considered in structuring an outbound investment ( , from a jurisdiction into the United States). Tax Checklist for Foreign - Owned Operations ORGANIZATIONAL STRUCTURE Non-presence Use of agents or distributors Choice of entity Branch Subsidiary Joint Venture Partnerships Limited Liability company (LLC) Capitalization Debt Equity Common stock Preferred stock OPERATIONAL STRUCTURE Taxation of enterprise Federal State and local Taxation of employees citizens Foreign nationals REPATRIATION OF EARNINGS Dividends Withholding (effect of tax treaties)

4 Interest Deductibility Withholding (effect of tax treaties) Sales Taxability to Foreign seller Arms-length standard (related party) Royalties Deductibility Arm s-length standard (related party) Withholding (effect of tax treaties) EXIT STRATEGIES Liquidation Trade sale Asset vs. stock sale Sale of real property Initial public offering Andersen Tax LLC, | Tax Planning for Foreign - Owned Operations 3 Typical Life Cycle of Foreign - Owned Operations It should be noted that the tax issues increase in importance as the enterprise advances through the typical life cycle of a Foreign - Owned operation.

5 STAGE LEGAL OPERATIONAL CHARACTERISTICS TAX CHARACTERISTICS Seed Use of unrelated third parties ( , distributors; no (or very limited) physical presence; no additional business structure None Start-up Physical presence; limited functions performed ( , ancillary and preparatory activities); form of business structure ( , branch or subsidiary) not significant Certain activities may be conducted in without giving rise to taxable presence ( , permanent establishment); payroll and employee tax issues appear. Growth Increased physical presence; activities directly connected to the business conducted ( , sales solicitation and customer support; research and development); tax consequences of choice of entity become important.)

6 Nature and amount of activities drive operational tax results; increased payroll and employee tax issues. Expansion Distribution or other significant elements of business conducted by operation; employee headcount rises. Increased activities typically give rise to increase in amount of tax; need for professional tax planning becomes apparent; continued employee tax issues. Mature Manufacturing or other production activities commenced; headcount rises. Need for operational tax planning increases ( , intellectual property migration).

7 This Guide focuses on the organizational and operational tax questions to be considered by a hypothetical Foreign - Owned enterprise that intends to conduct business activities in the United States. The critical tax issues relate to the taxation of the enterprise, its shareholders and its employees, although, at times, these considerations may be unrelated. This Guide assumes that the Foreign owner is a company , treated for tax purposes as a corporation that invests directly in the and, under the terms of the applicable United States Income Tax Treaty (Treaty), is a resident of the Foreign jurisdiction that satisfies the Limitation on Benefits article of the Treaty.

8 Therefore, the Foreign owner is eligible for the benefits available under the Treaty. Form of Organization There are several ways in which a Foreign company can operate a business in the The exact legal form the operation will take often depends on the nature of the business and the scale of the intended operation. Andersen Tax LLC, | Tax Planning for Foreign - Owned Operations 4 The possible choices for the organizational form of the operation include: Subsidiary Branch Partnership or Limited Liability company (LLC) Subsidiary.

9 The formation of a corporate subsidiary is generally not a taxable event. However, the corporate subsidiary would have to pay federal and state income taxes on its taxable income. Dividends paid by the wholly Owned subsidiary are subject to a withholding tax which under the Treaty is reduced from the statutory rate of 30% to a lower rate, typically 10% but in some cases to either zero or 5%. Dividends paid from the subsidiary to its Foreign parent are not deductible for corporate income tax purposes. Operating through a separately incorporated subsidiary generally avoids any engagement in business by the Foreign parent, provided that the subsidiary does not act as an agent for the Foreign parent.

10 As a general matter, the mere fact that a parent company owns a subsidiary does not, in itself, create a permanent establishment of the parent. It is crucial, however, to avoid any attribution of the subsidiary s activities as, for example, an agent of its parent. Thus, if the subsidiary is acting as a commission agent for the sale of its Foreign parent s goods, it is important that the subsidiary, which will likely be considered a dependent agent, does not have the ability to contractually bind the Foreign parent.